Feb.
17
2015

Profit from the Americans’ consumption!

The price of oil will stay low this year – even if geopolitical tensions are growing, or Saudi-Arabia dampens their production –, says Franz-Josef Loerch, Executive Director, and Client Portfolio Manager Global Fixed Income at J.P. Morgan Asset Management. He visited Budapest to attend a conference of Portfolio.hu. He told us – in contrast to what other foreign investors told us in our interviews – Europe and the euro cannot compete with the United States and the dollar. Currently, the world favours the United States and its consumers, and countries depending on oil import such as emerging Asian countries, or South-Africa can benefit as well. Our area, namely Hungary, is not providing the expected results; the forint keeps getting weaker rather than stronger – even further due to the coming interest rate cuts. According to the J.P. Morgan expert, the Spanish and Italian stocks seem to be the best investments in the European bond market.

Péter Zentai: Do you share the opinion at J.P. Morgan that following the decline of oil prices, asset managements should fundamentally reorganize the composition of their portfolios?
Franz-Josef Loerch:
Currently, we are focusing on the United States. The most extensive and fastest effects of the recent price falls are on the American markets. Americans spend fifty percent of their income on energy sources, mostly on gasoline; and on the American internal market, the price of petrol is clearly follows the movements of crude oil on the global market. Within a couple of months, the price of petrol halved at the American stations. A gallon of petrol is two dollars instead of four. Now, American civilians are spending that remaining – in total – hundreds of billions on other things, so consumption is steeply rising.
We can and we have to make profit from it.

From this, Fed concludes that soon it has to increase interest rates. That may restrict consumption…
Fed is not motivated by the fall of oil prices. The cycle of interest rate increase would have been initiated this year anyway, but apparently, as a result of the increased consumption due to the significantly cheaper energy prices, it may happen sooner, and more intensely than expected.

What if there was a turn of events: if due to geopolitical or other reasons – for instance, Saudi-Arabia restricts its extraction – oil and gas prices would start to rise again?
The developments of oil markets are the results of a significant oversupply generated through a long time; hence its price simply cannot be so high again, it will not reach hundred dollars a barrel. This is why the market does not respond to the Russian-Ukrainian war, and other challenges.
When looking for investment targets, our starting point is to find companies, exchange rates, and bonds which profit from the permanently low oil prices: trading, leisure, travelling…

And primarily America. So Wal-Mart and alike…
Rather the smaller and less well-known corporations with a potential for significant growth –but indeed, primarily Americans, along with ones whose bonds may be considered speculative. Services and stores which are connected to everyday life – both in their classic and online form. I manage fixed-income securities, mainly bonds. In this regard, I think it is an exciting opportunity that Apple, with a huge cash and overall stability, issues new bonds. And I do buy them.

What is your view on foreign exchange markets in consideration of the oil price changes?
We are sure that the American dollar will be able to get even stronger. Its strength is guaranteed by the further growth of American economy. However, not only the current, but the upcoming developments as well are suggesting that America will go through the longest and most dynamic economic growth.

Europe may catch up as well; and that could improve the situation of the euro – at least, this is what other investors and portfolio managers told me (see interviews with Vontobel, Wells Capital Management, Wellershof and Partners – Ed.).
Actually, I think differently. Europe – according to the forecasts – will stagnate for an even longer period. It will not be able to take up the American dynamics.
It is a different issue, that we do buy Spanish and Italian government bonds – to be precise, we exchange Bunds (German Federal bonds) for south European sovereign bonds. The latter ones took the most significant advantage of the huge (summing 1100 euros in one and a half year) ECB bond purchase programme.
Furthermore, bank stocks are also interesting in Europe. European banks – mainly banks of the euro-zone – are much disciplined, because they must comply with stricter regulations, hence they are more reliable than they were before. Their risk level is lower, so we think they can be fairly good investments.

Do you make benefits from the opportunities in emerging markets?
We think that the stocks of markets – such as the Indonesian, South-African, and other, mostly Asian markets – which were relieved by the low oil prices, so they can start to increase both their production and internal consumption as well.

Based on that, can Middle-Europe and Hungary be interesting for you?
So far, there is no sign of those dynamics. Mostly, because the internal markets of this area cannot reflect the movements of the world market quickly enough. The extraordinarily low energy source prices cannot have an appropriate effect on Middle-European markets – in contrast with Asian and American ones.

What is your opinion on the forint?
We think that The Central Bank of Hungary will have to cut interest rates, because the Hungarian economy is slowing down. Its rate does not meet the expectations. We think that this year GDP growth rates will certainly be lower than they were projected earlier. Interest rate cuts can weaken the forint. We expect that, however, as I said, we do not focus on this market.